National Agenda : Shrinking Fortunes in Iraq : Three years of sanctions have rewired society and devalued the dinar. Many lost out; a few made out.

BAGHDAD, Iraq — The dance floor of the Palestine Hotel's main ballroom was packed as Iraqi women dripping with sequins and gold jewelry swayed to the rhythms of the country's hottest pop group with petty traders and even some farmers in new, imported tailored suits. Arabic and American rock, amplified through a state-of-the-art sound system, blasted until well after 3 a.m.

Iraqi beer and imported Scotch flowed like water, and customers pulled out bricks of 25-dinar bank notes to pay tabs that soared into the thousands, all under the watchful eyes of a towering black-and-white portrait of Iraqi President Saddam Hussein.

Meanwhile, outside in the parking lot, a few young boys from what were once comfortably situated families were begging for money to buy food.

It was the Palestine Hotel's "Evening Family Party," admission 200 dinars--small change for Iraq's nouveau riche but half a month's salary for the country's million or so newly poor civil servants and a veritable fortune for what was once a solid middle-class of Iraqi professors, artists and intellectuals now on the brink of economic ruin.

The bizarre Thursday night scene in a nation struggling for survival after nearly three years of harsh U.N. trade sanctions was more than a mere peek inside one of the most secretive and now twisted societies on the globe.

It was a powerful illustration of how deeply the sanctions and Hussein's efforts to survive them have rewired the very fabric of Iraqi society.

Long ranked among the world's richest, oldest, and most resourceful cultures, Iraq and its 18 million people stand today as a case study of the social impact of economic isolation. At a time when the United Nations and Washington increasingly are turning to economic embargoes and trade sanctions to contain renegade regimes, it shows how such actions can hurt a people far more deeply than the leaders whose actions invited international sanction.

Nearly three years after his invasion and occupation of neighboring Kuwait set the stage for the devastation of Operation Desert Storm, Hussein appears stronger than ever--not despite the sanctions, many Iraqis claim, but in large part because of them.

The sanctions have been "a blessing in disguise," forcing the Iraqi regime to reorganize its economy toward self-sufficiency, Hussein's minister of information and culture, Hamid Youssef Hammadi, told The Times in an interview.

But he also conceded that there has been a severe impact on Iraqi society. Crime, he said, is up as much as 40%. At a time when a single piece of furniture costs a civil servant more than two years' salary, many young men and women have been forced to postpone marriage. And, despite his assertion that "we are coping," the minister added that he could not estimate how much longer the nation can last before it explodes from within.

"Of course, life is different than it was before 1990. That's for sure," he said. "But you see, it is the kind of difficulty that came suddenly for a prosperous country. And now it's three years. In the first year, people didn't bother. The second year was the most difficult. Now, the third year, people are coping, although some of them find it difficult."

Hammadi admitted that it is the one class that traditionally brings political change in society that is finding it most difficult to cope--the intellectual middle class. Once the Iraqi dictator's most serious potential threat from within, that group essentially no longer exists, having been wiped out by an annual hyper-inflation rate nearing 10,000%. These people have been forced to sell off their possessions, scrape for each meal and, in some cases, quit their jobs because transportation costs far outstripped their salary.

The Iraqi regime has further strengthened its base by maintaining an efficient, though costly, food-rationing system that covers up to 60% of the basic needs of its people but simultaneously increases their dependence on the regime.

To keep the food flowing, Hussein's government has been forced to pay extortionist prices to the once-poor farming class and to a previously insignificant class of petty traders, who have become overnight millionaires by arranging legal and illegal import deals. These newly powerful families actually would prefer to see the sanctions--and the regime--remain in place forever.

All the regime has to do to finance this sanctions-bound nightmare of a national economy is to print more money--billions and billions of new dinars, so worthless that one-dinar coins officially worth $3.33 apiece just three years ago are now sold for pennies per kilogram to metal workers who melt them down to make keys.

But such creative uses of a currency that is now worth about one U.S. cent per dinar is just one of the many examples of the irrational that abound in Baghdad's cultural and economic isolation.

A gallon of gasoline, for example, now costs the equivalent of a tenth of a cent.